Huawei Loser in SoftBank-Sprint Deal Over Alleged Spying

Huawei Technologies Co. is a Shenzhen, China-based company that is a focus of U.S. unease over potential spying. Photographer: Chris Ratcliffe/Bloomberg

May 30 (Bloomberg) -- The U.S. national-security clearance
of SoftBank Corp.’s $20.1 billion acquisition of Sprint Nextel
Corp. imposes the first restrictions on a third-party supplier
over allegations of Chinese spying.

Tokyo-based SoftBank and Overland Park, Kansas-based Sprint
yesterday said they’d been notified their proposed deal was
cleared by the U.S. Committee on Foreign Investment, an
interagency group that vets non-U.S. acquisitions. The deal
needs one more U.S. regulatory clearance.

The companies earlier gave assurances they’d limit use of
telecommunications gear made by Huawei Technologies Co., a
Shenzhen, China-based company named in a congressional report as
a cybersecurity risk to U.S. companies because of ties to the
Chinese military. SoftBank and Sprint, as a condition of the
national-security clearance, agreed the U.S. could compel Sprint
to remove “certain equipment” and approve future vendors,
according to a filing by Sprint.

“It’s not where you build it, it’s how you build it,”
Trey Hodgkins, a senior vice president for TechAmerica, a
Washington-based trade group that represents Verizon
Communications Inc., AT&T Inc. and CenturyLink Inc., said in an
interview. “It’s a false assumption to think you secure the
supply chain by saying you’re not going to buy equipment from
one particular company or another.”

Huawei and ZTE Corp., China’s largest phone-equipment
makers, have disputed allegations in an October report by the
House Intelligence Committee that their expansion may boost U.S.
exposure to cyber attacks and spying.

President Barack Obama plans to discuss cybersecurity when
he meets Chinese President Xi Jinping on June 7-8 in Rancho
Mirage, California, Jay Carney, the White House spokesman, said
in a May 28 press briefing.

Supply Chain

Japanese mobile carrier SoftBank and Sprint’s wireless
partner Clearwire Corp. use Huawei gear, which includes base
stations, servers, routers and switches. SoftBank and Sprint
have said they won’t integrate Huawei equipment, according to
U.S. Representative Mike Rogers, a Michigan Republican who is
chairman of the House Intelligence Committee.

The panel’s report in October recommended that U.S.
companies doing business with Huawei and ZTE find another
vendor.

“We’re the committee that produced the report that
expressed to the world our strong concerns about Huawei,”
Rogers said in an interview yesterday. “I don’t think any of
those concerns have been mitigated. We all should be worried
from a national security perspective about Huawei gear being in
the United States.”

Precedent Setting

A government move to rein in use of Chinese gear “may
cause companies that are looking at a potential acquisition to
scrutinize their supply chain and their vendors well in
advance,” Mark Plotkin, a partner at Covington & Burling LLP in
Washington who has handled cases before the foreign-investment
committee, said in an interview.

“It certainly sets a precedent,” Darrell West, vice
president of governance studies at the Brookings Institution, a
Washington-based policy group, said in an interview. “Once
you’ve established these rules for one business they may try and
do that elsewhere.”

William Plummer, a spokesman for Huawei, in an interview
called an exclusion from doing business with a U.S. carrier “a
non-remedy for a legitimate concern.”

“Pull any of the major global vendors out of the question
and you have solved nothing, because they all rely on common
global supply chains and they are all subject to common global
vulnerabilities,” Plummer said.

Back-End Concern

U.S. policy makers and lawmakers have pointed to a growing
body of evidence the Chinese government is behind coordinated
cyber attacks aimed at stealing American trade secrets and
disabling computer networks that operate banks, power grids and
telecommunication networks.

The Pentagon this month for the first time accused the
Chinese military of intruding into U.S. computers to steal
sensitive data. The Alexandria, Virginia-based computer security
company Mandiant Corp. released a report in February concluding
that the People’s Liberation Army in China may be behind the
hacking of at least 141 companies worldwide since 2006.

The decision by the foreign-investment committee in the
Softbank-Sprint merger was “widely expected” and won’t have
much of an impact on U.S. telecommunication companies, Bari said
in an interview.

“Most telecoms in the U.S. already avoid purchasing
network infrastructure from Chinese manufacturers like Huawei
and ZTE,” he said.

Dish, FCC

Winning national-security clearance shores up SoftBank’s
effort to ward off the $25.5 billion counteroffer for Sprint
from Dish Network Corp., the Englewood, Colorado-based
satellite-television supplier seeking to expand into
smartphones.

“The U.S. government should proceed with deliberation and
caution in allowing assets of national strategic importance --
such as the Sprint fiber backbone and wireless networks -- to be
owned and operated by a foreign company with significant ties to
China,” Stanton Dodge, Dish’s general counsel, said in an e-mailed statement.

“Congress should take a close look” at the review
process, Dodge said.

Holly Shulman, a spokeswoman for the foreign-investment
committee, declined to comment.

The national-security clearance leaves the Federal
Communications Commission as the last U.S. agency examining the
SoftBank bid for Sprint.